The industrials and materials sectors may show the most visible signs of strain from China’s slowdown, but they’re hardly the only ones struggling this year. China Merchants Bank’s Shanghai shares have lost more than 20% year to date, with the country’s cash crunch and rising lending rates, part of a shakedown of the Chinese financial sector that threatens the future of all but the strongest of the country’s banks. As Beijing takes a hands-off approach to the banking sector and China’s slowdown intensifies, there’s a good chance this bank and others could keep struggling as shadier lenders fizzle.
China’s energy sector has taken a hit, despite being home to one of the world’s largest and most powerful companies, Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI). Shares have lost more than 12% despite the company’s truly global reach, as the company’s chemicals unit has seen sales slump because of China’s slowdown and the resulting weaker demand. Even the country’s housing leaders have seen shares fall this year despite strong demand, as prices have skyrocketed in the nation’s largest cities and squeezed many Chinese citizens out of the market.
With stocks falling across the board, what’s an investor to do in China?
China’s game changes
One thing’s clear: You won’t be able to count on China as a magical supplier of rapid growth, the way its economy has done in the past. China’s evolving into a slower-growth reality as the country and its population mature. That means you’ll have to follow the same rules that have guided the best investing strategy for decades: Look out for the long term and do your homework before jumping into an investment.
The woes of China’s banking sector are a perfect example of how weaker, more opaque companies in the nation are beginning to fall. Top Chinese financial companies will weather the country’s credit crunch, but Beijing’s more than happy to allow shakier lenders to fall if it’ll help out the sector’s long-term health. That’s not just a good policy by the government; it’s a strong warning for investors that, like in many markets, it’s the best and most financially sound companies and stocks that are most worthy of your investment.
Companies such as Baidu.com, Inc. (ADR) (NASDAQ:BIDU) that have shown success and demonstrated marked advantages are the best and safest bets in a new, slower-growth China. Baidu.com, Inc. (ADR) (NASDAQ:BIDU)’s command of more than 70% of the Chinese search market and more than 50% of the mobile search market bodes well for the company as the country’s population urbanizes and grows wealthier, even as rivals have begun to chip away at the company’s dominant market share.
Keeping an eye on Beijing’s policymaking is equally important, particularly as the Chinese government takes an active role in critical business areas, such as the aforementioned materials sector. State-owned companies such as Aluminum Corp. of China Limited (ADR) (NYSE:ACH) have gotten in their current predicaments partially because of the government’s aims of dominating select markets. For investors of state-owned companies such as Chinalco, Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI), PetroChina, and others, ignoring Beijing’s ownership of these companies is risky gambling at its worst. As China’s economy continues to slow, it’s critical to watch how the government adapts — and how those changes will affect your stocks.
